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How might a budget deficit affect the balance of trade

Question : How might a budget deficit affect the balance of trade : 2158606

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) How might a budget deficit affect the balance of trade?

A) A budget deficit reduces interest rates, which reduces exchange rates and reduces the balance of trade.

B) A budget deficit raises interest rates, which raises exchange rates, and reduces the balance of trade.

C) A budget deficit raises interest rates, which raises exchange rates, and increases the balance of trade.

D) A budget deficit reduces interest rates, which raises exchange rates, and reduces the balance of trade.

2) What impact might an increase in the budget deficit have on interest rates and exchange rates?

A) Interest rates and exchange rates decrease.

B) Interest rates decrease, and exchange rates increase.

C) Interest rates increase, and exchange rates decrease.

D) Interest rates and exchange rates increase.

3) How does an increase in the budget deficit affect the demand and supply of dollars on the foreign exchange market?

A) The demand for dollars rises, and the supply of dollars rises.

B) The demand for dollars rises, and the supply of dollars falls.

C) The demand for dollars falls, and the supply of dollars falls.

D) The demand for dollars falls, and the supply of dollars rises.

4) How would a decrease in the budget deficit affect the exchange rate in the market for dollars?

A) The exchange rate will decrease.

B) The exchange rate will not be affected by a change in the budget deficit.

C) The exchange rate will increase.

D) The impact of the decrease in the budget deficit on the exchange rate cannot be predicted.

5) What two measures of macroeconomic activity are often referred to as the "twin deficits"?

A) the foreign exchange deficit and net foreign investment

B) the budget deficit and the trade balance

C) net capital flows and net exports

D) the savings-investment deficit and the export deficit

6) An increase in U.S. federal government budget deficits that raises U.S. interest rates relative to the rest of the world should

A) decrease foreign portfolio investment.

B) cause the dollar to depreciate.

C) lead to a current account deficit.

D) raise the trade balance.

E) increase net exports.

7) Which of the following is true about the occurrence of the twin deficits?

A) They only occur when exchange rates are fixed.

B) They occur consistently in all the economies of the world except the U.S.

C) They did not occur in the 1990s in the U.S.

D) They always occur together.

8) Persistent current account deficits in the United States

A) cause persistent declines in investment in the U.S.

B) is a vote of confidence in the strength of the U.S. economy.

C) cause U.S. investors to accumulate more foreign assets than foreign investors accumulate U.S. assets.

D) will eventually cause the value of the dollar to rise.

9) In theory, what should the rising U.S. current account deficit do the value of the dollar?

A) If should increase the supply of dollars and increase the foreign exchange rate of dollars.

B) It should decrease the supply of dollars and increase the foreign exchange rate of the dollar.

C) It should increase the supply of dollars, and decrease the foreign exchange rate of dollars.

D) It should decrease the supply of dollars and decrease the foreign exchange rate of the dollar.

10) Why has the large U.S. current account persisted?

A) Foreign investors are reluctant to invest in U.S. real and financial assets.

B) The supply of dollars on the foreign exchange market has fallen.

C) Foreign investors have refused to hold large quantities of dollars.

D) The foreign exchange value of the dollar has not decreased.

11) Why has the dollar remained strong and its value not decreased as much as economists expected given the current account deficit?

A) Foreign investors continue to invest in U.S. financial assets, and this raises the demand for dollars.

B) Foreign investors no longer want to hold dollars and this raises the demand for dollars.

C) Foreign investors have reduced the level of investment in U.S. financial assets, increasing the supply of dollars.

D) The negative trade balance due to the current account deficit reduces the supply of dollars.

12) The U.S. is called a debtor nation because

A) it has a large financial account deficit that is used to fund the current account deficit.

B) it has a large balance of payments deficit that is used to fund the current account deficit.

C) it has a large current account deficit and is simultaneously funded by foreign investment.

D) U.S. capital outflows are much greater than U.S. capital inflows.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

13) An increase in the government budget deficit will not lead to a current account deficit if domestic investment declines.

14) The large budget deficits of the early 1990s resulted in large current account deficits.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

15) Explain why the budget deficit and the trade deficit are sometimes referred to as the "twin deficits."

16) How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

17) Expansionary monetary policy will have what effect on the components of aggregate demand?

A) Consumption will fall, but investment and net exports will rise.

B) Consumption will rise, but investment and net exports will fall.

C) Consumption, investment, and net exports will rise.

D) Consumption and investment will rise, but net exports will fall.

18) Which of the following is not "crowded out" by higher interest rates as a result of expansionary fiscal policy?

A) private investment

B) government spending

C) net exports

D) consumption

19) If the Fed does not take into account the additional policy channels available in an open economy, then ________ when conducting contractionary monetary policy,

A) it is likely to increase GDP too much and inflation will persist

B) it is likely to increase GDP too little and cause a recession

C) it is likely to decrease GDP too little and inflation will persist

D) it is likely to decrease GDP too much and cause a recession

20) If the government finances an increase in government purchases with an increase in taxes, which of the following would you NOT expect to see?

A) a decrease in net exports

B) a decrease in the interest rate

C) an increase in aggregate demand

D) an increase in the exchange rate

21) How does expansionary monetary policy affect net exports?

A) Expansionary monetary policy increases exports and increases imports.

B) Expansionary monetary policy reduces exports and increases imports.

C) Expansionary monetary policy increases exports and reduces imports.

D) Expansionary monetary policy reduces exports and reduces imports.

22) Suppose the Fed pursues a policy that leads to higher interest rates in the U.S. How will this policy affect real GDP in the short run if the U.S. is an open economy? This policy

A) reduces investment spending, consumption spending and net exports, all of which reduce GDP.

B) increases investment spending, consumption spending, and net exports, all of which increase GDP.

C) reduces investment spending and consumption spending, both of which reduce GDP. Net exports fall which increases GDP.

D) reduces investment spending and consumption spending, both of which reduce GDP. Net exports rise which increases GDP.

23) Why is the multiplier for contractionary fiscal policy smaller in an open economy?

A) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which decreases net exports.

B) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which raises the foreign exchange value of the dollar, which increases net exports.

C) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports.

D) Contractionary fiscal policy increases the deficit, which raises the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports.

24) If the Fed is using policy to combat inflation, what is likely to happen in the foreign exchange market and to the foreign exchange value of the dollar?

A) the demand for the dollar will increase and the foreign exchange value of the dollar will rise.

B) the demand for the dollar will increase and the foreign exchange value of the dollar will fall.

C) the demand for the dollar will decrease and the foreign exchange value of the dollar will fall.

D) the demand for the dollar will decrease and the foreign exchange value of the dollar will rise.

25) Which of the following would you expect to increase both interest rates and exchange rates?

A) expansionary monetary policy

B) contractionary monetary policy

C) expansionary fiscal policy

D) Both B and C will increase both interest rates and exchange rates.

26) The impact of crowding out

A) is larger in an open economy as compared to a closed economy when fiscal policy is contractionary.

B) is larger in a closed economy as compared to an open economy.

C) is larger in an open economy as compared to a closed economy.

D) is larger in a closed economy as compared to an open economy when the fiscal policy is contractionary.

27) Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy.

A) stronger; open; weaker; open

B) weaker; open; weaker; open

C) weaker; closed; weaker; closed

D) stronger; closed; weaker; open

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

28) Expansionary fiscal policy should raise the exchange rate of the dollar.

29) Contractionary monetary policy should increase foreign financial investment in the U.S.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

30) Is fiscal policy more or less effective in manipulating aggregate demand in an open economy?

31) How is the impact of contractionary monetary policy different in an open economy than in a closed economy?

32) How is the impact of expansionary fiscal policy different in an open economy than in a closed economy?

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